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cGMP cloud over good results

Q3FY24 beats expectations

Aurobindo Pharma (ARBP IN) beat our revenue and EBITDA estimates by 2% and 9% in Q3FY24. Revenue across business segments came broadly in line with our expectations. Lower other expenses helped EBITDA margin come in 150bps above our estimate, leading to an EBITDA beat. We estimate ~USD 40mn contribution from high-margin gRevlimid in Q3FY24. ARBP Aurobindo management intends to spread out gRevlimid opportunity more of less smoothly across quarters.    

cGMP clouds over otherwise strong US outlook

Strong pick-up in the US generics cycle continues and ARBP is among the best-placed to capitalize on it. Strong pipeline that includes gRevlimid, gMyrbetriq, gOpsumit, gPomalyst and several other injectables and biosimilars add to robust outlook. However, the recent US FDA inspection in ARBP's injectables facility and the subsequent shut-down of some production lines cloud the business outlook. While the management aims to return to normalcy in 2-3 months, we are not so confident. We still have not ruled out the possibility of an import alert on the facility, which can have a 15%+ impact on consolidated EBITDA in our estimates.

Biosimilars, Penicillin G, biologics CDMO – other growth drivers

ARBP’s biosimilars program may be a major growth driver, near-to-medium term. The penicillin-G project may start contributing in FY25. Per back-of-the envelope calculation, it may contribute ~USD 300mn revenue in 2-3 years. Biologics CDMO may be another growth driver in 3-4 years – recently-announced partnership with MSD is a strong start.

Valuation: Maintain BUY; TP retained at INR 1,208  

We maintain FY24E core EPS but lower FY25E by 2% to reflect temporary disruption in the injectables facility. ARBP trades at 16.4x FY25E core EPS. Valuation is attractive; but one should keep in mind the risk from adverse US FDA action on the injectables facility. We maintain BUY with TP retained at INR 1,208, which is 16.9x FY26E core EPS plus cash per share.

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